A pro-growth financial services package?

November 2024 

Hot on the heels of her first Budget, Rachel Reeves has delivered her first Mansion House speech as Chancellor of the Exchequer.

Mansion House speeches are watched closely, as they indicate the Chancellor's priorities for the financial services industry. This is particularly the case in the first term of a new government and a raft of policy documents were published following the speech.

The speech signalled more than ever that the government is seeking to balance regulators' existing remits with the goal of driving growth in financial services and, in turn, the real economy. 

The accompanying policy package is reminiscent of prior attempts to invigorate the sector, such as the previous government's Edinburgh Reforms. On FS regulation, the measures announced largely progress and build on policy already under way, with the notable exceptions of the joint review of the redress system by the FCA and FOS, and new policy proposals to consolidate and scale pension schemes. 

There is emphasis on reducing regulatory burden, although this is targeted rather than representing a dramatic ripping up of red tape. There is also an emphasis on `co-design' of policy with a focus on government working together with industry and across regulators, which will be welcomed by financial services firms.

It remains to be seen how quickly the reforms can be delivered and how effective they will be in practice. 

The Chancellor remarked that the `UK has been regulating for risk, but not regulating for growth.' Therefore, while not ignoring the regulators' primary objectives, HM Treasury's (HMT) remit letters to the regulators ask them to consider how to enable `informed and responsible risk-taking' by authorised firms and customers. HMT also emphasises the need to accelerate the adoption and embedding of the secondary international competitiveness and growth objective. To help raise UK productivity, HMT is keen to ensure that regulators support innovative new firms to enter the market, and to enable existing firms to innovate and invest in new technologies. HMT also wants firms to have positive experiences engaging with regulators with administrative burdens streamlined as far as possible. 

As expected, the Chancellor's speech outlined plans for significant reforms of the UK pensions industry to address fragmentation, facilitate scale and improve governance, with the aim of unlocking increased private investment. Through the introduction of a Pensions Scheme Bill in 2026, the reforms would:

• Create 'megafunds': this would be achieved by consolidating assets from 86 Local Government Pension Scheme (LGPS) authorities into eight pools. The new funds would need to be authorised by the FCA, their governance arrangements would be overhauled and an independent review process would be established to ensure each of the schemes' Administering Authorities are fit for purpose. A consultation will run until 16 January 2025.
• Consolidate multi-employer defined contribution schemes: the government is also consulting on introducing minimum size thresholds for these schemes, new measures to facilitate consolidation into megafunds, and new legislation to allow fund managers to more easily move savers from underperforming schemes to ones delivering higher returns.

The Chancellor also used the speech to share the interim report of the Pensions Investment Review, initially launched in July. Interim findings are presented for each of the four workstreams (scale and consolidation in the DC workplace market, LGPS, cost and value considerations in the DC market, and UK investment).

The new government has committed to delivering a `world-leading sustainable finance framework', built in partnership with industry. This will include investment in clean energy projects through the new National Wealth Fund, coupled with significant private investment. 

In addition to the Climate Investment Fund Capital Market Mechanism launched on the London Stock Exchange (LSE) in early November, and in line with one of the key recommendations from the recently published Transition Finance Market Review, the government will co-launch the Transition Finance Council alongside the City of London Corporation.

The government is consulting until 6 February on the case for a UK Green Taxonomy. This is a consultation on the potential value, key design features and challenges to usability of a UK Taxonomy, not, at this stage, on specific activity-level standards, or on wider UK climate and environmental strategies. This could be viewed as something of a backward step, considering work done already by the Green Technical Advisory Group (GTAG) under the auspices of the Green Finance Institute. However, firms may welcome a sense-check now, given they are already under pressure from existing sustainability reporting and disclosure requirements and that the EU Taxonomy, on which the UK Taxonomy was likely to be modelled, has not been without problems.

The government has also published a consultation response and draft legislation to bring ESG ratings providers into regulation. A new chapter, `15F' is added to amend the Regulated Activities Order (RAO) in respect of the definition and scope of ESG Ratings activity.

Other sustainability-driven initiatives will include:

• The launch of a set of integrity principles for voluntary carbon and nature markets on 15 November at COP29, followed by a consultation in 2025.
• The intention to consult on streamlined sustainability disclosures for economically significant companies. 
• A consultation in the first half of 2025 on how best to take forward the manifesto commitment on transition plans. 

Various measures will be taken forward to promote innovation and reform aspects of the capital markets.

The Chancellor confirmed that the government will legislate to establish the Private Intermittent Securities and Capital Exchange System (PISCES) by May 2025 - an exchange designed to facilitate fundraising for private companies. Following consultation, the government has published feedback alongside its response (PDF 3443 KB), as well as draft legislation (PDF 469 KB) to establish the PISCES sandbox and an accompanying policy note (PDF 167 KB). Industry can feed back on the draft legislation until 9 January 2025. The Chancellor announced the launch of a parallel pilot to issue gilts using distributed ledger technology in the form of the Digital Gilt Instrument (DIGIT).

The government also plans to legislate to give the FCA fuller powers of direction in relation to the reporting of OTC positions to increase transparency - allowing the market and the FCA to manage better market volatility such as the Nickel event in March 2022. HMT will start the process of moving MiFIR/MiFID from legislation into the FCA rulebook, in particular the transaction reporting and organisational requirements. At the same time, the FCA has launched a wide-ranging discussion paper (PDF 1414 KB) on the future of the transaction reporting regime. It is seeking feedback on where the regime could be simplified along with associated costs, the most burdensome aspects of the regime for firms, the scope of firms subject to the requirements and changes to improve the quality of reported data.

The Chancellor announced the publication of the National Payments Vision, identifying that there needs to a clear, predictable and proportionate regulatory framework and resilience infrastructure. Three pillars will guide future activity - innovation, competition and security. The Payments Vision Delivery Committee has been established, chaired by HMT and with senior representatives from BoE, FCA and PSR. The FCA welcomed the Vision, noting that it shares the vision of an innovative, safe and competitive payments sector.

The Chancellor alluded to the Basel 3.1 and SDDT capital regime announcements from September 2024 as `the final stage of our post-crisis reforms to banks' capital requirements', noting that this marked `the end of the journey to ensure that banks are well-capitalised'. She called out the benefits of strengthening the resilience of the banking system whilst protecting banks' ability to lend to small and medium enterprises, referencing actions already taken by the PRA to support competitiveness.

Further actions were announced to support the mutuals, cooperatives and credit unions. The government has written to both the PRA and FCA requesting an assessment of the current mutuals landscape by the end of 2025, to inform government and regulators' consideration of how best to support the sector to drive inclusive growth across the UK, including effective and proportionate regulation. It has also launched a call for evidence on whether there is a case to change parts of the common bond requirement for credit unions, to better support their sustainable growth. 

The Chancellor highlighted insurance markets' pivotal role in driving growth. To support this, the government is consulting on a new approach to captive insurance companies (vehicles for self-insuring risk from companies within the same group), again continuing to progress policy commitments made by the previous government. 

The consultation will be welcomed by insurers and corporates as a step towards levelling the regulatory playing field with jurisdictions that have established themselves as hubs for captives. It is high level and does not set out specific policy proposals. Instead, it seeks views on the merits of establishing a dedicated captives regime, its potential scope and exclusions, and the applicable regulatory framework (conduct and prudential) and regulatory approach to captive managers.

In addition, the PRA has released a consultation on Insurance Special Purpose (ISP) vehicles, aiming to speed up the regulatory approvals for new catastrophe bond applications from 4-6 weeks to 10 days (as previously signalled by the PRA).

In a separate announcement the day after the Mansion House speech, the PRA concluded its Solvency II review process and published the final package of rules and policy materials that will replace Solvency II assimilated law.

The Chancellor acknowledged the ongoing challenges associated with the advice gap and signalled that the FCA will propose `transformational changes'. An FCA discussion paper sets out the approach and covers the three key components making up the advice guidance boundary review:

1. Clarification of the existing boundary between advice and guidance to give greater certainty to firms. The FCA has tried this type of clarification before with limited success, so it will be interesting to see if this can help firms get closer to supporting customers without straying into advice. 
2. Proposals for a simplified advice regime offering personal recommendations for straightforward needs. Again, this has had a lukewarm response when suggested previously. 
3. Creation of a new 'targeted support' regime - arguably the most transformational component. This will enable firms to proactively and holistically provide specific interventions to improve consumer support and aid customer understanding.

The proposed changes, which will be consulted on in due course, will help consumers make more informed decisions, leading to better pension outcomes. They will also help firms realise the, as yet, uncrystallised commercial opportunities generated by the Consumer Duty. However, a balance needs to be struck between good firm and good customer outcomes, therefore oversight and governance will play a critical role. The targeted support proposal, due in December, will be initially limited to pensions but a consultation on investments will follow in Spring 2025.

Given recent media coverage on the topic of consumer redress, firms may be interested to note that the Chancellor signalled reforms in this area, including a new agreement between the FCA and the FOS on how they cooperate in practice. 

The FCA and FOS have also launched a Call for Input to understand how the redress framework could be modernised to better serve consumers and to provide greater stability for firms to invest and innovate - particularly in the context of `mass redress' events where many customers complain about the same issue. In addition to inviting views on modernisation, the authorities want to understand better the issues caused by mass redress events, where the framework could be improved to enable these events to be better identified and managed, and whether changes could help bring about more consistency in the FCA and FOS's views on regulatory requirements. The Memorandum of Understanding between the two has also been updated to improve how they work together on important issues.

There were no noteworthy announcements regarding ambitions around market access for UK financial services firms. However, the Chancellor noted that she will be guided by the principle of free trade, including with the US and the EU. On the latter, she restated that Brexit will not be reversed but emphasised the need to `reset' the relationship. She also called for engagement with wider economies such as India, China and the Gulf states to realise new opportunities.

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